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4% withdrawal even with the drop ?
Old 07-12-2008, 11:29 AM   #1
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4% withdrawal even with the drop ?

I was wondering how many are sticking with the 4% withdrawal even while the market drops . I have a lot of extra padding in my budget so I'm dropping back to under 3% until I see some positive signs .
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Old 07-12-2008, 11:35 AM   #2
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Unless you think something worse than the Great Depression is coming, 4% should hold.

I don't know that people have been this panicked about their money in more than 60 years, and if that feeling persists or gets worse, you never know what self-fulfilling prophecies may lie ahead.
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Old 07-12-2008, 11:38 AM   #3
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I was doing less than 4% even before the drop-----

but if my net worth keeps shrinking I may have to end up doing much more than 4%! Scary!
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Old 07-12-2008, 11:56 AM   #4
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If you are using the "4% of year end balance" rule, your withdrawals reduce automatically when your portfolio declines. That's one of the nice features of that model--it explicitly accounts for the behavior most of us actually exhibit when things get rough.

Time for a gut check for those counting on the "4% of begining balance + inflation forever" withdrawal model. If, today, you aren't comfortable withdrawing some pre-determined amount regardless of market conditions, maybe you should switch withdrawal models and see what FIRECALC gives as a result. Imagine we were having 10% inflation and your portfolio were really down 5%, would you REALLY just automatically withdraw the pre-set amount from the previous year (representing 4% of the start value with all the inflation updates) plus 10% extra to account for inflation?
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Old 07-12-2008, 12:03 PM   #5
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I won't be in the withdrawal phase until next year, but naturally have been thinking about this, since it looks like I may be retiring into a bear market at the very least.

With my conservative asset allocation and longevity genes, I am figuring on withdrawing less than 4% even in a good economy. (When I say 4%, or some other percentage, I tend to think in terms of samclem's "4% of the year-end balance" of my portfolio.)

When the economy is not good, my portfolio will be dwindling and I will not like that. So, knowing myself, I am pretty sure that I will withdraw only around 1.5% or less at times such as we have been experiencing recently.

When the economy is healthy and vibrant, or if my portfolio exceeds a certain value even in a crummy economy, I might withdraw as much as 3% - 3.5% if I could think of something to spend it on. I will probably ease into that, though, since that would be substantially more I am used to spending.
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Old 07-12-2008, 12:14 PM   #6
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Originally Posted by samclem View Post
Time for a gut check for those counting on the "4% of begining balance + inflation forever" withdrawal model. If, today, you aren't comfortable withdrawing some pre-determined amount regardless of market conditions, maybe you should switch withdrawal models and see what FIRECALC gives as a result. Imagine we were having 10% inflation and your portfolio were really down 5%, would you REALLY just automatically withdraw the pre-set amount from the previous year (representing 4% of the start value with all the inflation updates) plus 10% extra to account for inflation?
Keep in mind that this model survived the Great Depression and the high inflation bad market of the 1970s. We tend to have short memories about things like this that make us think these are the worst and the scariest times ever.

Having said that, just because "4% plus inflation for life" hasn't ever failed with a 60/40 portfolio doesn't mean it *can't* fail. Then again, there are no guarantees for *any* level.
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The 95% Rule
Old 07-12-2008, 12:17 PM   #7
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The 95% Rule

In Work Less, Live More, there is the 95% Rule, which says to tighten your belt and take out only 95% of last year's withdrawal in tough times (even if the amount you withdraw exceeds your normal safe withdrawal rate).
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Old 07-12-2008, 12:18 PM   #8
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Originally Posted by samclem View Post
If you are using the "4% of year end balance" rule, your withdrawals reduce automatically when your portfolio declines. That's one of the nice features of that model--it explicitly accounts for the behavior most of us actually exhibit when things get rough.
That's how I handle getting more conservative when my portfolio shrinks. But I don't have to worry about it until next January and who knows what things might look like then.

Audrey
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Old 07-12-2008, 12:39 PM   #9
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I was doing less than 4% even before the drop-----
I could cut golf if I had to, but I would stick my head in a gas oven if it comes to that point. My w/d rate is much less than 4%, so I should be able to keep teeing it up.
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Old 07-12-2008, 12:43 PM   #10
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gas oven <=> no golf?
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Old 07-12-2008, 02:12 PM   #11
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my brother & sil are a little upset with me that i'm not on vacation with them right now. but i just can't justify to myself spending any more money than need be when times don't look so good. to make this even more absurd, they were paying for everyone; it wouldn't have cost me a dime.

i find that even with my daily gas use. it's not like an extra thousand bucks a year in gas makes much of a difference. i just don't like the idea of spending so much money when i can do without it.

i may be cheap, but at least i'm not broke.
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Old 07-12-2008, 02:23 PM   #12
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I am not yet retired but this year we have definitely curtailed our spending (5-10% lower than last year) even though our income has increased about 20%. Most of the curbing seems to be done unconsciously because we don't really feel like we are cutting back, but the truth is we must be. Maybe it's just watching the news and feeling all the gloom and doom, I don't know.
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Old 07-12-2008, 02:39 PM   #13
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If you are not liquidating stocks, it doesn't matter whether the market is up or down. 4% is either OK, or not OK, a priori to market distress.

What counts is the underlying earning power of your investments.

OTOH, if you want to save money to pour it into stocks at recent prices, then cutting back may be a good idea.

What I find really funny is that for years anyone who suggested on these forums that valuation of stocks mattered in choosing a withdrawal rate was stoned.

Now, it seems like some are indeed closet believers in valuation- although they seem to have applied the principle backwards. After all, valuations are better today than they were when the market was >20% higher, aren't they?

Ha
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Old 07-12-2008, 03:48 PM   #14
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I'm only planning a 2.5% withdrawal, but if I was on a 4% withdrawal plan and my investments lost more than 5% by year end then I would withdraw the same as the year before (no inflation adjustment). More than 10% then I'd be looking at more serious cutbacks in spending.
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Old 07-12-2008, 04:21 PM   #15
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What I find really funny is that for years anyone who suggested on these forums that valuation of stocks mattered in choosing a withdrawal rate was stoned.

Now, it seems like some are indeed closet believers in valuation- although they seem to have applied the principle backwards. After all, valuations are better today than they were when the market was >20% higher, aren't they?
Great point. It goes to show that the best plans on paper are only good as the emotional resolve to follow them.

The 4% rate was tested to weather the Depression of the 1930s and the low-growth, inflationary 1970s. So if someone believed in 4% on that basis, I would submit that they have to be convincing themselves that this will be worse than BOTH of those events in order to justify dropping the rate if they believed it survived those previous lousy markets. Either that or they are discovering that fear trumps reason.

IMO, it's a perfect example of emotions like greed and fear clouding rational thinking.

If nothing else, the 4% theory is being shown as just another general truism that people abandon in bad and uncertain times -- *exactly* the kind of times that number was created to survive.
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Old 07-12-2008, 05:33 PM   #16
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Thanks everybody , It's nice to read seasoned retirees take on this . I may do some remodeling so that will bring me up to 4% . I did recaclculate my 4% after this drop and that's the number I'm using not the Jan.1 4%.
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Old 07-12-2008, 05:46 PM   #17
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Originally Posted by Moemg View Post
Thanks everybody , It's nice to read seasoned retirees take on this . I may do some remodeling so that will bring me up to 4% . I did recaclculate my 4% after this drop and that's the number I'm using not the Jan.1 4%.
If you faithfully recalculate your 4% each time the market declines and adjust your spending accordingly, your chances of running out of money before you run out of you are virtually nil...

I'm sticking with my spending plan for now. If the market hasn't shown marked improvement by the time my cash bucket is depleted in 2 years, I'll make some changes. I might consider drastic measures like drawing SS early.
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Old 07-12-2008, 06:37 PM   #18
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I was wondering how many are sticking with the 4% withdrawal even while the market drops . I have a lot of extra padding in my budget so I'm dropping back to under 3% until I see some positive signs .
I think everyone should stick to their 4% withdrawal plans and send the excess to Bill Bengen's retirement fund.

We've saved thousands this year by not going on a college tour-- between hanging with her friends, driver's ed, and her summer job the kid isn't in much of a mood to travel anyway. Maybe we'll take a short college trip during fall break.

During the last trip we got awful tired of hearing "All y'all's from Hawaya, and yer vacationin' hee-yur?"
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Old 07-12-2008, 07:15 PM   #19
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During the last trip we got awful tired of hearing "All y'all's from Hawaya, and yer vacationin' hee-yur?"
Just curious, where was that? I know you didn't vacation in Mississippi.
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Old 07-12-2008, 07:43 PM   #20
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If you are not liquidating stocks, it doesn't matter whether the market is up or down.
Ha
Of course that is true as long as up comes after, and is more significant than, down.
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